How To Create A Debt Payoff Plan
Are you ready to create a debt payoff plan but don’t know where to start? If so, this post is for you.
Want to watch the video version of this post? Check it out here!
My husband and I are currently on a debt-free journey.
Our journey started in 2015 when we got married. We started going through Dave Ramsey’s Financial Peace University and we got a good start with our debt snowball.
Shortly after that, my husband got sick and we had to slow things down for a few years. Once we were able to start back up, we kicked it into overdrive.
Now, we are working on getting that debt paid down as quickly as possible.
I realized while we were going through my husband being sick that if we didn’t have debt, we would have been able to pay the medical bills.
We would have also been able to stay on top of other things that we got behind in while we were going through that time in our lives.
I started doing Debt Snowball updates in August of 2020. I did that to hold myself accountable, so you will know that real people actually go through debt-free journeys.
When I started sharing the Debt Snowball updates, I wanted to make sure that we had a solid debt payoff plan before I put everything out on the internet.
Now, I want to show you how we created our plan and help you do the same.
A debt payoff plan is not only about paying off debt. It’s about getting out of debt and being able to do what’s important to you at the same time.
Let’s get started with step one.
Add up your debt
Step one is to add up all of your debt. This might be the hardest step because it’s hard to face reality, especially if you have a large amount of debt.
Before we started our journey, my husband and I had no idea the amount of debt we had. It was so eye-opening to be transparent and write down all the debt.
In this step, figure out exactly how much you owe. Download your credit report from one of the three credit bureaus and write down the amount that you owe for each debt.
Keep this information in a spreadsheet, notebook, or an app on your phone. This helps you keep track of everything that you owe.
List your debt from smallest to largest
Step two is to list all of your debts in order from smallest to largest.
Now, you don’t have to pay them off in this order but it’s easier to stay organized when they are listed in order.
Be sure to include interest rates in this list to make informed decisions on tackling this debt.
If you need a worksheet to help you stay on track, grab this debt snowball tracker. The worksheets have a place for you to list all of your debts from the smallest to the largest.
Create a realistic budget
Step three is to create a realistic budget. We want to move away from the debt and take a look at your current finances for this step.
During your debt-free journey, you want to make sure that your regular bills are paid on time and that you’re keeping track of subscriptions.
You don’t want to get behind on anything while you’re trying to get out of debt.
Once you’ve created your budget, you’ll be able to see how much money you have left over each month after all of your expenses are paid.
That’s how much money you have to pay off your debt.
Create your debt payoff plan
Step four is to create your debt payoff plan. This step is where you spend the bulk of your time.
You want to make sure that you make the right decision on how you want to pay off your debt.
Do you want to pay off your debts from smallest to largest, to feel a sense of accomplishment very quickly?
Or do you want to pay off your debt based on the interest rate to save money in the long run?
That is completely up to you. It’s different for everybody, and it depends on the type of debt that you have.
My husband and I chose to pay off our debt from smallest to largest because we wanted to feel that sense of accomplishment.
In some cases, it makes sense to pay down the debt with the highest interest rate. This works for things like car loans and student loans, as opposed to medical debt.
In order to stay motivated on your debt-free journey, give yourself a few milestones and rewards to stay on track.
We create a goal at the beginning of the year.
If we reach this goal, we will reward ourselves with something that we don’t usually get. We treat ourselves every time we reach our milestones.
Another way to stay motivated is an accountability partner.
Everybody should have an accountability partner, whether it’s your spouse, your parents, or your friends.
Make sure you have someone in your corner to motivate you and celebrate with you along the way.
If you can’t find an accountability partner, send me an email, and I will celebrate all of your wins with you.
The bottom line
Now you have the four steps to create a debt payoff plan that gives you a full picture of your finances and your priorities.
Commit to working on your plan and reaching your financial goals.
Once you get in the habit of being intentional with your money, it will come second nature to you.